- Personal Finance
How to buy funds and invest without broker fee/commission - advantages of passive investing
When we purchase a load fund (A mutual fund that comes with a sales charge or commission) from a brocker, we have to pay a sales charge of 4-6 %. Ofcourse, the brocker will likely tell us that our funds are managed by some top pros in the business and we are paying for their wise counsel and guidance. However, the research shows that the load funds perform no better than non-load funds.Then why should we pay the broker and buy a load fund.
The crux of the strategy is : Rather than paying a commission to the broker and hiring an expert or spending lots of time wondering which stocks are likely to be the top performers, just invest in index funds and just forget about it!
What is an Index Fund?
The prices of the stocks of large publicly held companies that trade on either of the two largest American stock market exchanges; the New York Stock Exchange and the NASDAQ are indexed. eg. The S&P 500 is a index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. Index Fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor's 500 Index (S&P 500).
Index Level Performance (as of 27-Dec-2010)
Advantages of Indexing
Index funds outperform about 80% of all actively managed funds over long period of time.The main reason for this is: rock-bottom costs.
1. No commission to the broker:
Since this is index fund, there is no need to pay for the broker. You are buying an index. You are not buying stock-picking skill nor money management skill or anything else than a fund that replicates an index. All your money is put to work for you. Cheap is beautiful :-)
2. Low expense:
If you have a load fund, you have to pay annually 1-2% of the balance of your investment to pay for the fund manager. Annual expense of index fund is below 0.5%. It is easily managed using your computer (you simply replicate the index).
3. Higher Diversification and low Risk
4. Tax Efficiency: Every time an active fund sells a profitable stock, it creates a taxable event that's passed on to the investor.
How to buy Index Funds?
I hope you found this article useful. If you like to read more about the index funds and investment tricks I have given the links to some of the best books in the field. You can click on those links and buy them directly from there.